The Pivot to Non-interest Income – how challenging is it?

Generating higher fee income is increasingly a focus for many banks across Asia, given structurally declining NIM. However, this is far from straightforward. Many Asian banking markets have faced a combination of regulatory, structural and cyclical challenges over the last couple of decades which negatively impacted their ability to grow their fee income. Collaborating with colleagues across the region, we have developed a country framework to help us rank risk and opportunity around fee income. China, Thailand, Australia have seen significant compression in their fees/asset ratio. Conversely Taiwan, Singapore, and India are doing relatively better, benefiting from strong regulatory and structural tailwinds such as growth of their wealth management industries.

In our Q-Series published earlier this year we discussed how Asia is undergoing a demographic transformation which will have a substantial effect on Asian economies and banking systems. Our analysis identified three significant megatrends stemming from an ageing population. As these unfold, banks will be forced to seek alternative income streams, driving them to shift their focus towards non-interest income (non-II).

Firstly, focusing on non-II alone is not sufficient to offset the headwinds from net interest income (NII). Overall profitability for banks still face downward pressure unless banks also focus on other offsets like improving efficiency, geographical expansion, consolidation etc. Secondly, differences in regulations, competition and structural / cyclical challenges can be significant and matter for the ability to generate fee income across markets.

Based on our discussion and analysis around fees and non-II, we developed a framework to evaluate banking markets across Asia. Markets that looks relatively better on this framework are Indonesia, Singapore, Malaysia, and Japan. On the other hand, markets that ranks less well are China and Thailand.